Spain lending rate hits 7%, in bailout danger zone

By Alan Clendenning, Associated Press

MADRID
–
Spain's borrowing costs rose to dangerously high levels Monday as finance ministers of the 17 countries that use the euro began to gather in Brussels to discuss terms of a rescue package for the country's stricken banks.

Oli Scarff, Getty Images

The control tower of Spain's Cuidad Real International Airport stands dormant after closing April 6, 2012, due to the nation's financial crisis.

The control tower of Spain's Cuidad Real International Airport stands dormant after closing April 6, 2012, due to the nation's financial crisis.

Sponsored Links

The interest rate, or yield, on the country's 10-year bonds hit 7% Monday, a level that market-watchers consider is unaffordable for a country to raise money on the bond markets in the long term and the point at which Greece, Ireland and Portugal all sought an international bailout. Stocks on Madrid's benchmark index fell 1.7%. The yield later fell back down to 6.99%.

The yield indicates the interest rate a government would have to pay to raise money from financial markets when it holds bond auctions. While Spain can afford the high rates for a few weeks at least, the country would find them too expensive in the longer term.

Ministers will use the meeting in Brussels to attempt to secure Spain's teetering economy, with progress expected on both the bailout loan and a relaxation of the government's financial targets.

The 17 countries that use the euro have committed to support a loan for the banks of up to €100 billion ($124 billion), but the precise amount needed may not be known until September, when the results of all the bank inspections are in, Simon O'Connor, an EU spokesman, said Monday.

Monday evening, the so-called eurogroup of finance ministers will attempt to reach an agreement on what conditions will be attached to Spain's bank bailout loan, which will codified in a "memorandum of understanding" to which the country must agree. The 17 ministers — some of whom will need to get approval of the agreement from their parliaments — will probably meet again, later in July, to give final approval to that document.

Spain — the fourth-largest economy in the eurozone — has been struggling to keep a lid on its government deficit in the midst of a recession while trying to support its troubled banking industry weighed down by toxic loans and assets from a collapsed property market. There are fears that should Spain need a bailout of its own, the eurozone would struggle to finance it, pushing the region further into recession.

"I expect that already today we will have strong progress on the Spanish situation," French Foreign Minister Pierre Moscovici said Monday on his way into the meeting.

France's government, however, has sold short-term bonds at negative interest rates for the first time, a sign of investor confidence despite concerns about French debts and the wider eurozone. Despite the dropping rates, France's economic outlook is stagnant. President Francois Hollande said growth in the first half of this year is expected to be "nil."

Yields have been falling on French medium and long-term bonds in auctions over the past couple of months, as investors flock to the perceived safety of Europe's larger economies.

Irish Foreign Minister Michael Noonan said a draft communique regarding Spain was being circulated. And German Finance Minister Wolfgang Schaeuble said he expected results Monday. "I think we will agree on a binding framework and a schedule," he said.

The Spanish foreign minister, Luis de Guindos, also said a preliminary agreement was likely.

"We will be analyzing what the implications are for the Spanish side. We will also hear about the measures we are taking and will take," de Guindos said, apparently alluding to a likely increase in VAT tax, a levy on goods and services.

He said there was also "rather broad agreement" on the general terms of bank bailout. "We expect to seal it this evening and tonight," and it will be formally approved at another meeting of eurozone finance ministers, expected on July 20, he said.

Following Monday's meeting, finance ministers from all 27 European Union countries, in a choreographed companion maneuver, will meet Tuesday to consider giving Spain an extra year — until 2014 — to meet its budget deficit target of 3%. The European Commission, the EU's executive arm, has formally endorsed that proposal.

The eurogroup ministers will also meet Greece's new finance minister, Yannis Stournaras, for the first time Monday for preliminary discussions on whether to adjust conditions accompanying the country's bailout.

Officials say no formal decisions are expected from the meeting Monday. But Moscovici said he was optimistic the EU would emerge from its financial crisis, in light of action taken toward further economic and political integration at a summit meeting of EU leaders last month.

"I remain very confident that … the European Council for the first time addressed the globality of the solution, including the problems of development, financial stability, the future, integration, solidarity — the European Union that we want," Moscovici said.

In an appearance Monday before a committee of the European Parliament, Maria Draghi, the chief of the European Central Bank, also exuded optimism. Banking union in the European Union, he said, would be achieved.

"The first thing to be created will be the supervision. We are talking about the long-term sustainability of the European monetary union. We are going as fast as we can. It is better to do things right than in a hurried fashion. We certainly want to see this thing wrapped up by the end of the year," he said, referring to banking oversight.

"By the end of this year we will have something that is not perfect, but achievable," he said.

But Dutch Finance Minister Jan Kees de Jager said the EU's firewall funds cannot directly bail out banks until there is a banking supervisor — and Spain's banks need money now, which can only be loaned through the government, increasing the public debt.

"Then the government must stand as guarantor," De Jager said. "That way Spain runs a risk, that's true."

———

Slobodan Lekic and Robert Wielaard in Brussels, Toby Sterling in Amsterdam and Daniel Woolls in Madrid contributed to this report. Don Melvin can be reached at http://twitter.com/Don—Melvin

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

For more information about reprints & permissions, visit our FAQ's. To report corrections and clarifications, contact Standards Editor Brent Jones. For publication consideration in the newspaper, send comments to letters@usatoday.com. Include name, phone number, city and state for verification. To view our corrections, go to corrections.usatoday.com.

Posted | Updated

USA TODAY is now using Facebook Comments on our stories and blog posts to provide an enhanced user experience. To post a comment, log into Facebook and then "Add" your comment. To report spam or abuse, click the "X" in the upper right corner of the comment box. To find out more, read the FAQ and Conversation Guidelines.